NAME:___________________________________________________ STUDENT ID:______________

TUTORIAL ISTISNA’

XYZ Islamic Bank entered into a two-year Istisna’ contract to construct a diesel power generator for a
total price of $600,000 commencing 1 January 2002. The following costs were estimated at the time
of concluding the contract

31 December 2002 31 December 2003

Materials 120,000 60,000
Wages 180,000 120,000
Total 300,000 180,000

Billings were made in tear 2002 for $225,000 and the remaining balance was billed at the end of the
year 2003.

Following is the payment schedule that was agreed with the client of XYZ Islamic Bank:

Year % of total price

2002 10%
2003 10%
2004 20%
2005 30%
2006 30%

The XYZ Islamic Bank incurred general and administration expenses totalling $5000 during 2002

Substantial increase in material cost occurred in 2003 due to liquidation of a major supplier for the
said material. Accordingly, the bank revised its cost estimate for material to be $60000 higher than
the previous planned

The bank recognises revenue based on the percentage of completion method

Required:

(a) Prepare all necessary journal entries for the years 2002 to 2006 to record the above
transactions in the books of XYZ Islamic bank
(b) Prepare the statement of financial position and income statement of the XYZ Islamic bank
for the year 2002 and 2003 to present the transactions relating to the contract
NAME:___________________________________________________ STUDENT ID:______________

TUTORIAL ISTISNA’

In the year 2010, the islamic bank of Brunei entered into an Istisna contract with Malaysian
government to build a highway project at $20 million in three years time, to be delivered at the end
of year 2012. The bank billed Malaysian government as follows:

Year % of total price

On Signing of contract 10%
End of year 2010 30%
End of year 2011 20%
End of year 2012 20%
End of year 2013 20%

The government paid the bank one month after the billing date.

The istisna contract clearly indicated that any increase in costs will be borne by the bank and will not
be paid by the government. However, the government agreed not to charge any penalty if the bank
is able to deliver within 6 months after the due delivery date

The bank immediately entered into parallel istisna’s contract at $16 million with MTD Berhad to
build the highway project according to the Malaysian government specification. MTD berhad did not
agree to bear any additional cost over-run. However, if MTD berhad did not deliver the project on
the due date, it was agreed that the bank will charge a penalty of 5% per annum of the actual total
costs at pro rata basis and the penalty to the charity

The payment by the bank would be 2 months after each billing was made to the bank. The payments
made by MTD berhad during the first two years are as follows:

Year 2010 $7.6 million

Year 2011 $5.0 million

In year 2012, the total costs were anticipated to increase to by $5million and MTD berhad informed
the bank that they required an extension of 6 months. They billed the bank #3.4 million during the
year 2012.

On 31 March 2013, MTD berhad completed the highway. However, the actual costs has only
increased to $17 million. Mtd Berhad billed the bank the remaining amount during year 2013 and
was paid accordingly in the same year. MTD also paid the penalty to the bank.

Assume that the percentage of completion method is used in the books of Islamic banks of Brunei

a. Prepare all necessary journal entries for the years 2002 to 2006 to record tihe above
transactions in the books of XYZ Islamic bank
b. Prepare the statement of financial position and income statement of the XYZ Islamic bank
for the year 2002 and 2003 to present the transactions relating to the contract
c. Would you prefer BBA or istisna contract from and Islamic bank to finance an unfinished
house? Why?
d. Discuss the similarities and differences between Salam and Istisna